Obamacare, Debt Ceiling—Yup, Here We Go Again

Republicans and their allies are still insisting that a key Obamacare provision amounts to a taxpayer-funded “bailout” of the insurance industry. And now they may demand its repeal in exchange for giving the U.S. Treasury authority to borrow money and pay the government’s bills.

The provision is called the “risk corridor” program. And while it’s unclear whether Republicans are really willing to have another showdown over the debt ceiling, it’s clear they intend to keep making the “bailout” argument—right up through the midterm elections. “The idea that the federal government should be bailing out insurance companies in order to make Obamacare work, that’s not something a lot of people are aware of,” Senator Marco Rubio said on Fox News a week ago. “I haven’t taken a poll on it, but I guarantee you it would be hugely unpopular.”

Rubio is probably right about the politics. But the substantive argument Republicans and their allies are making remains unconvincing—for some reasons that are familiar and one that may not be.

To review, in case you missed the discussion earlier this month: The risk corridor program is one of the law’s built-in “shock absorbers,” designed to stabilize the insurance market while carriers adjust to new regulations that prohibit them from denying coverage, withholding benefits, or charging higher premiums to people with pre-existing medical conditions. The rationale for these provisions is pretty simple.

Insurance companies set premiums based on who is likely to buy their insurance policies. But, particularly when a new program is starting, the company actuaries can’t make such predictions with a lot of confidence. An insurer might guess wrong—by, for example, underestimating how many young, healthy people will buy. If that happens, the premiums won't be sufficient to cover medical bills, and the insurer will lose money. The opposite can also happen. An insurer might expect to attract lots of sick people, but end up with only a few. In that case, the insurer would have more than enough money to pay medical claims—and end up with a windfall.

Under the risk corridor program, the federal government promises share in either the losses or the gains, beyond a certain minimum threshold. The more money the companies lose, the more the federal government absorbs the losses...

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...and the more money the companies make, the more the federal government takes the gains...

Along with “reinsurance,” a related provision of Obamacare that has also attracted criticism, risk corridors have been around for a long time. The Swiss national health care plan, which delivers universal coverage through private insurance carriers, has risk corridors. So does Medicare Part D, which provides prescription drug coverage to America’s seniors. Pretty much any scheme to expand insurance coverage through private carriers requires risk corridors, or something like them, which is why even some conservatives critical of Obamacare are now vouching for them. Here’s Yevgeniy Feyman writing in Forbes.

…if you want insurers to participate more broadly in the individual market, you’ll need to offer a carrot to offset the unavoidable uncertainties. And railing against risk corridors now will make them a hard sell further down the road. Risk adjustment mechanisms get you the buy-in of insurers, but they also help keep premiums at manageable levels while insurers develop enough experience to properly price plans on their own. This helps encourage people to enroll in these plans, which in turn helps insurers develop the necessary pricing experience – resulting in a virtuous cycle.

But Feyman doesn't have much company. And one reason is the program's supposed cost. When the Congressional Budget Office made its formal cost estimates for the Affordable Care Act, it assumed that the money coming in would be roughly the same the money going out, so that the program would be budget neutral. The law’s critics on the right, including generally thoughtful, well-informed observers like David Hogberg and Ramesh Ponnuru, have said the CBO is almost certainly wrong—that the insurers are going to discover they are not getting as many healthy people as they anticipated. Conn Carroll of Townhall.com has also made that point. Because of that, these writers say, the program is likely to pay out more money than it takes in. As a result, taxpayers will be on the hook, if not for the irresponsibility of insurers than for the irresponsibility of the whole system.

Here’s Ponnuru, writing for Bloomberg View in response to my previous argument on the subject:

Risk corridors, if they’re limited, can serve a useful function. … We’re looking at a different scenario now. Health insurer Humana Inc. recently warned that enrollees in the exchanges will probably be sicker than anticipated. So few if any insurers will be in surplus, and many will be seeking help. In other words, the exchanges as a whole will be unbalanced and in need of a taxpayer bailout. … When the assumptions behind a company’s plans turn out to be wrong, and the federal government protects the company from the losses that would normally result, it’s reasonable to call that a bailout -- and to object. Taxpayers, after all, took no irresponsible actions.

A few points here. First, it’s true that young people are not signing up for Obamacare at rates proportional to their share of the eligible population. But what really matters is how enrollment compares to what the insurance companies actually expected. And while Humana officials have said they are attracting sicker enrollees than they expected, Aetna’s CEO recently told the Washington Post’s Sarah Kliff that the demographics of new customers actually appears “better than I thought they would have been.” With nine weeks of open enrollment still to go, it’s way too soon to know what’s really going to happen.

But suppose the conservative critics are right. Suppose that most insurers end up taking losses—and that, as a result, the risk corridor program ends up costing the taxpayers money. How much would it really be? Nobody has done the official math on how big the payouts could get. But James Capretta and Yuval Levin, writing in the Weekly Standard, say “This year it could easily cost taxpayers hundreds of millions and perhaps billions of dollars.” That’s consistent with what I’ve heard informally from experts. And in the context of the Affordable Care Act—let alone the entire federal budget—that’s not a ton of money. Remember, the original CBO projections suggested that the federal government would spend about $26 billion on exchange subsidies and nearly twice that on the coverage expansion as a whole.

Here's where we get to the least familiar—and potentially most important—argument of the whole debate. The premiums insurance companies are offering this year are lower than the CBO expected. As a result, the federal government will probably end up spending less—quite possibly a lot less—subsidizing private insurance for the poor and middle class. So even if the taxpayers have to pay more to insurers through risk corridor payments, they will be paying less to insurers through subsidies. And this isn’t just some happy coincidence: The higher risk corridor payments and lower subsidies are products of the same root cause.

Will any of this matter when Republicans are refusing to raise the debt ceiling unless Democrats repeal the risk corridors? Or when 30-second ads about "insurer bailouts" flood the airwaves this fall? Maybe not. But the risk corridors make perfect sense as policy—and conservatives should know this as well as anybody.